Legal Terrain

Greening the Deal: Environmental Due Diligence for Corporate and Real Estate Transactions

January 4, 2024


Working as part of a transactional team here at Burns & Levinson, the attorneys in the Environmental Group assist with due diligence activities and provide guidance on contractual language to document accurate representations and frame deal terms to capture and allocate responsibility for environmental risks.

An important understanding of any transaction, particularly in Massachusetts, is that the environmental laws generally impose status liability for releases of hazardous substances. Thus, by virtue of being an owner or operator at a property, regulators will use that “status” to impose cleanup obligations on the owner or operator as a “Responsible Party.”

Even though a current owner or operator may not have “caused” the release, with status liability, the state may look to a current owner or operator to execute an effective cleanup of the contamination. Of course, that party will be able to make demands on other Responsible Parties to seek contribution and recovery of response costs under the hazardous waste statutes.

But, in the eyes of the state, if a party is performing the required remediation, the regulators are less concerned with the precise level of culpability for the original release. In broad public policy terms, this is a benefit to all of us as taxpayers because it helps keep the state as the remedial actor of last resort and encourages those parties involved in the subject property to undertake the front-line responsibility for the remediation of a release of oil or hazardous materials.

Given the operation of status liability and how it can impose significant responsibilities on a party that steps into the chain of ownership or becomes an operator at a subject property, it is important to execute sufficient due diligence before acquiring a property or assuming a lease obligation.

We recommend involving the environmental legal team early and working through them to investigate with an environmental professional familiar with the local regulatory landscape.

At a minimum, having the environmental engineering or licensed site professional perform a Phase I Environmental Site Assessment pursuant to the latest ASTM standard is recognized as meeting the “all appropriate inquiry” requirement for protection from liability under the federal Superfund statute.

[Practice Note: As of February 13, 2024, the acceptable ASTM standard will only be 1527-21, as 1527-13 is officially phased out. Thus, any assessment work being commission in the new year should follow 1527-21 to comply with the “all appropriate inquiry” standard even if the deal closes after the sunset date for 1527-13.]

In addition to performing due diligence, the buyer team will also work to assess existing environmental liabilities and, to the extent necessary, devise indemnification provisions, escrow agreements, or insurance coverage to protect the buyer against potential downside environmental risks.

We also work with sellers who are positioning their assets for the market. Having a strong understanding of environmental risks is equally important for a seller’s representations and warranties associated with the deal. Of course, we also work on the mirror image contractual provisions to ensure that, from a seller’s perspective, reasonable protections are in place to secure the deal or limit reopeners for a buyer agreeing to take on a property with some environmental risks. If a buyer is agreeing to take on a remediation, we will also insist on recognizable regulatory benchmarks the acquiring entity must achieve to secure everyone’s long- term benefit that the remediation is resolved.

Business and real estate advising is a core element of our client advocacy. Environmental due diligence can uncover difficult deal dynamics, but early understanding and resolution can also ensure risks are understood and priced correctly to allow deals to flow in the ordinary course.

We look forward to working with you on these important transactions.

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